Key points of investment
Incident: In 2023, the company achieved revenue of 1,916 billion yuan, yoy -29.91%, net profit to mother of 556 million yuan, -2,492 million yuan in 2022, adjusted profit of 140 million yuan, and -576 million yuan in 2022, turning a loss into a profit.
Continued focus has put pressure on revenue, and the results of reducing costs and increasing efficiency are remarkable. The company's revenue declined 29.91% year on year in 2023, mainly due to: 1) the company focused on boutique games and discontinued non-key games, putting pressure on overall game revenue. In 2023, the company's game operation business achieved revenue of 1,849 billion yuan, yoy -26.95%; 2) The company focused on the main game business and divested the IP derivatives business. The business revenue in 2022 was 140 million yuan. On the profit side, the company's loss narrowed drastically in 2023, and adjusted profit turned loss into profit, mainly due to: 1) The company continued to focus on boutique game development and increased its own channel operations through Fanbook, etc., and the gross margin increased 19.74pct to 35.14% year over year. If the impact on share impairment, which had a significant impact on 2022, the gross margin for 2022 was 36.0%/37.3%; 2) Continued cost reduction and efficiency. The 2023 sales/management/R&D expenses rates were 12.03%, 5.69%, and respectively 12.52%, yoy-29.61pct, +1.21pct, +0.72pct. The decrease in sales expenses was mainly due to a decrease in the number of games operated and an increase in promotion efficiency. The decrease in R&D expenses was mainly due to a decrease in R&D investment after Fanbook's basic functions were improved, and AI improved R&D efficiency and reduced game development costs.
The stock game is in long-term operation, and we expect new games to release flexible performance. In 2023, the company's core old game continued to operate on a long-term basis. “Dream Garden” and “Dream Home” were continuously iterated to achieve an increase in the number of users. Revenue increased by more than 50% year-on-year, reaching a new high since launch. The old game “Subway Parkour”, which has been online for 10 years, continues to be popular and remains at the top of the iOS free game list, and Layou has steadily built up the company's performance base. In terms of new games, the PC version of the two-dimensional shooter “Carapicchu” developed by the company was in public beta in February 2024, and remained at the top of WeGame's hot new product list. During the public beta period, “Carapicchu” was online for more than 120 minutes per person per day. In the future, “Kalapichu” will continue to update content such as new gameplay, new maps, new characters, etc., and will land on multiple platforms such as console and mobile in the global market. We look forward to a steady increase in the number, activity, and traffic of the “Carapicchu” mobile game, as well as further growth in performance driven by subsequent multi-platform launches.
Actively embrace the AI wave and be optimistic about the value increase in the Fanbook community. The company actively embraces AI to enable game development and community scene construction. Among them, Fanbook is a scarce community application and actively deploys AI tools to help users create content and enhance community activity and interactivity. By the end of 2023, Fanbook had added more than 10 million new users, and the content creator base continued to grow, and creative content was exposed more than 2 billion times on various platforms. We are optimistic that Fanbook is deeply connected to game content and users. As the scale and activity of users grow, community value is expected to gradually be released.
Profit forecast and investment rating: Considering the company's continued investment in R&D and the pace of launching self-developed products slightly slower than our expectations, we lowered the 2024-2025 EPS forecast and added a 2026 EPS forecast of 0.15/0.32/0.38 yuan (0.29/0.36 yuan before 2024-2025), corresponding to the current stock price PE 18/8/7X, respectively. We are optimistic about the start of the company's new travel cycle. Performance flexibility is expected to gradually materialize and maintain the “buy” rating.
Risk warning: New travel performance falls short of expectations, industry competition intensifies, industry regulation risks